Tuesday, May 10, 2016

To GDP Or Not To GDP

...One particular challenge for economic measurement stems from the fact that an increasing share of consumption comprises digital products delivered at a zero price or funded through alternative means, such as advertising. While free virtual goods clearly have value to consumers, they are entirely excluded from GDP, in accordance with internationally accepted statistical standards. As a result, our measurements may not be capturing a growing share of economic activity....

...The digital revolution is also disrupting traditional business models. The reduced search and matching costs offered by a range of online platforms are unlocking the market for skills (known as the “gig economy”) and the market for underutilized assets (known as the “sharing economy”). This, too, causes conceptual and practical measurement challenges for established GDP calculus. The traditional statistical distinction between productive firms and consuming households leaves little room to account for households as value creators.

Measuring GDP, it turns out, is like trying to hit a moving target. The digital revolution is likely to be followed by yet another wave of disruptive technology, including advances in materials science, artificial intelligence, and genetic engineering. As the economy evolves, so must the frame of reference for the statistics we use to measure it.

Next, an extract from Diane Coyle's "GDP: A Brief but Affectionate History" on the World Economic Forum (excerpt):

...Specifically, take the question of whether or not Ghana is officially a poor country. Aid organizations use a threshold in terms of real GDP per capita set by the World Bank to designate whether a country is “low-income” or “middle-income,” and this in turn determines the kind of assistance it gets in aid and cheap loans. Until November 2010, Ghana was considered “low-income,” that is, a poor country. But between 5 and 6 November 2010, its GDP increased by 60% overnight, turning it officially into a “low-middle-income” country. The reality had not changed, but the GDP statistics had, because the country’s statistical agency had updated the weights used in calculating the price index, and consequently real GDP, for the first time since 1993.

Likewise, when Nigeria “rebased” its GDP calculations in 2014, it overtook South Africa to become the continent’s largest economy. A shift to take more account of booming industries such as mobile telecommunications and Nollywood movies, because of how much more significant they had become, increased the country’s GDP by 89% in one swoop. So Africa as a whole is probably not as poor as we’ve long thought. The trouble with using old weights is that the structure of the economy changes quite dramatically over time. In many African, Asian, and Latin American economies, the GDP calculations take no account of phenomena such as globalization, or the mobile phone revolution in the developing world....

...Some countries are using weights that have not been changed since 1968, and only ten sub-Saharan African countries use weights less than a decade old. In each case, where old weights have been used for years, there will be large upward revisions in estimated real GDP when the weights are updated. This could profoundly change our impression of the character and weakness or strength of these economies; one estimate suggests that for twenty years, sub-Saharan African economies have been growing three times faster than suggested by the “official” data....

...Just as with developing countries now, changing the method of calculating a price index presents a different pattern of growth. The seemingly technical issue of how best to calculate a price index has some profound implications. In short, the choice of techniques completely alters even the broad outlines of the big picture on economic growth.

...In the mid 1990s William Nordhaus, an economist at Yale University, looked at two ways of measuring the price of light over the past two centuries. You could do it the way someone calculating GDP would do: by adding up the change over time in the prices of the things people bought to make light. On this basis, he reckoned, the price of light rose by a factor of between three and five between 1800 and 1992. But each innovation in lighting, from candles to tungsten light bulbs, was far more efficient than the last. If you measured the price of light in the way a cost-conscious physicist might, in cents per lumen-hour, it plummeted more than a hundredfold.

Mr Nordhaus intended this example to illuminate a general point about how flawed economists’ attempts to measure changes in living standards are. Any true reckoning of real incomes must somehow account for the vast changes in the quality of things we consume, he wrote. In the case of light, a measurement of inflation based on the cost of things that generated light and one based on a quality-adjusted measure of light itself would have differed by 3.6% a year.

When a first-year undergraduate first encounters the idea of GDP as the value added in an economy, adjusted for inflation, it sounds pretty straightforward, says Sir Charles Bean, the author of a recent review of economic statistics for the British government. Get into the details, though, and it is a highly complex construct—and, as Mr Nordhaus’s fable shows, a snare for the unwary....

...The problem is not just that it is hard to make these calculations. It is that what the calculations produce is a measure put to too many purposes, and, though useful, not truly fit for any of them. And there are worries that things may be getting worse. As the price of light illustrates, standard measures miss some of the improvements delivered by innovation….These days it seems that a growing fraction of innovation is not measured at all. In a world where houses are Airbnb hotels and private cars are Uber taxis, where a free software upgrade renews old computers, and Facebook and YouTube bring hours of daily entertainment to hundreds of millions at no price at all, many suspect GDP is becoming an ever more misleading measure....

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About Me

An applied and practicing economist in the Malaysian financial sector.

The purpose of this blog was first to have a way to put down and present my ideas, work in progress, and thoughts on the Malaysian economy. The second reason was to hopefully attract critiques and feedback, that would help me improve on my own understanding of the way the world works, or at least, this little corner of it.